Tax Evasion and Productivity

Hans Martinez

Western University

April 11, 2023

Update

  • Identification does not depend on functional form, i.e., CD
    • Show theory
    • Show Translog
    • Use deconvolution for CD and Hu et al. (2022) for non-parametric
  • Maybe not able to use very large firms because they are very few. Even though it is true they are more sophisticated and they do not overreport costs, from a statistical perspective I can’t learn too much from them
  • Use small firms as lower bound estimates. They cheat, but they cheat a little. Small firms are:
    • Less sophisticated -> Higher income owners are more likely to have firms engaging in cost overreporting
    • Lower probability due to the lower number of transactions -> ghost transactions are caped at the threshold to avoid being forced into e-transfer (cash)
  • Pending update in the paper:
    • Estimate tax evasion at the firm level Hu et al. (2022)
    • Show tax evasion effect in misallocation framework

Outline

  • Looking ahead
    • The Job Market
    • Miscellaneous
  • JMP update
    • Ecuadorian data
    • Measure of size: 1) Data; 2) Carrillo et al.
  • Next steps
    • Deconvolution

Looking ahead

  • Plan: 2024 JM
    • Have JMP mostly done by the 2023 Fall
    • Apply to conferences by Early 2024 Winter
    • Present at conferences during 2024 Summer
    • Go to Job Market Fall 2024

Miscellaneous

  • Funding, out by 2023 summer; ~$3K monthly (tuition, rent, services)
    • Teaching
    • Graduate Fellow rather than Graduate Student Assistant
  • 2nd and 3rd papers
    • Are you OK working with multiple projects simultaneously?
      1. Summer Paper with new twist and 2) new idea

Misc 2

  • Networking
    • Cold email: Targeting canadian universities with a PhD program located in cities with manufacturing sector
    • CEA
  • Applying for PR (Canadian market)
    • Goal to submit docs by end of 2023 summer
    • Took English Test (CELPIP-G) (March 18, 2023)
    • Next: ECA’s
  • Web page (done!), research (draft) and teaching (to do) statement

Upcoming presentations

  • UWO Applied Seminar: May 24, 2023
  • CEA, Winnipeg, Manitoba: June 2-3, 2023

JMP update

  • Ecuadorian Tax data:
    • Agustin Carvajal, a former member of Ecuador’s Fiscal Research Institute (now extinct), is willing to provide access to data
    • Data can only be accessed in Ecuador
    • Paul Carrillo, author of Tax Evasion paper, agreed to talk
  • Ecuadorian firm data:
    • Now using Manufacturing and Mining Survey (EMM), which includes small, medium, and large firms before, Structural Survey only covers large firms
    • Still fewer observations than Colombian data (Colombia’s manufacturing GDP is 2.5+ times bigger than Ecuador’s)

Measure of firm size

Who are the non-evaders? What’s the threshold of size?

  • Data:
    • Last time: \(exp\left(E\left[\ln\left(\frac{\rho M}{PY}\right)\Big | S\ge s\right]\right)=\beta\)
    • Today: adding confidence intervals, keeping labor and capital, adding alternative measures of size lag of paid taxes, sales, and production
  • Ecuador paper: eye-balling ~95-98 percentile of firm revenue

Carrillo et al., 2022

All industries

All industries

All industries

Summary

  • Using Labor (number of employees, and number of employees \(x\) years, and somewhat less total wages) as measure of firm size is consisten with my model
  • Different bias magnitude for different industries suggest different opportunities for tax evasion through cost overreporting — which makes sense!
  • High \(\beta\)’s for top deciles of lag taxes, lag output, and lag sales suggest there might be a dynamic component in tax evasion
    • Firms might adjust their prior probabilities the next period. If they were not caught cheating, they might cheat again

Next steps

  • Repeat exercise with Ecuadorian data
  • Select industries in both countries
  • Deconvolution using Labor as the measure of firm size
    • Colombia
    • Ecuador
  • Model?
    • Structural model counterfactual estimation for showcasing in JM

hansmartinez.com

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Table 1: Conferences
Conference Conference Name Date Submission Location
IIO International Industrial Organization Mid April 2023-01-31 North America
CEA Canadian Economics Association First week June 2023-02-10 Canada
NASM-ES North America Summer Meeting- Econometrics Society Mid June 2023-02-12 North America
IAAE International Association of Applied Economics Mid June 2023-02-21 Mostly Europe
RIDGE-Public Econ Research Institute for Development, Growth, and Economics Mid May 2023-02-19 Latin America
LACEA-LA-ES Latin American and Caribbean Economic Association Mid November 2023-03-30 Latin America

Job interests

  • What?
    1. Academia
    2. Research-focused non-academic: government agency, tech company, consulting
  • Where?
    1. Canada
    2. Mexico
    3. USA